Quick Test Flashcards
What is inflation?
A sustained increase in the average price level of an economy, over time
What is deflation?
A sustained fall in the general price level (rate of inflation becomes negative)
What is demand pull inflation
When there is excess demand
What is cost push inflation
When costs rise
What does demand pull inflation lead to
An increase in demand for goods and services due to customers shopping more, this means that business need to increase their price. Others do this leading to inflation.
What does cost push inflation do?
The costs of production increase, this means businesses will see a fall in profit. Businesses will then increase their price.
How does interest rates effect the level of inflation in the economy?
An increase in Interest rates leads to a decrease in inflation:
- Bank of England increases IR, leading to borrowers to be unhappy
- This causes the cost of borrowing to increase
- Any left over income will decrease
- The demand for goods and services will decrease
- Causes a decrease in Business prices, leading to a fall in inflation
How does direct tax effect the level of inflation in the economy?
An increase in the rate of direct tax causes inflation to decrease:
Incomes fall so demand falls, decreases price which leads to a fall in inflation.
How does indirect tax effect the level of inflation in the economy?
An increase of the price of raw material leads too the cost of production to rise
Businesses will increase their prices in order to maintain profit margin. This causes an increase in cost push inflation.
How does government spending effect the level of inflation in the economy?
An increase in government spending increases inflation:
- The government spending helps to provide jobs
- This causes an increase on personal income.
- The demand for goods and services increases
- Causing an increase in business prices and overall an increase in inflation.
